China's Industrial Profit Growth May Be Unsustainable, Experts Say
Yicai Global
/SOURCE : Yicai
China's Industrial Profit Growth May Be Unsustainable, Experts Say

(Yicai Global) Nov. 28 -- The sustainability of China's industrial profit growth is still questionable given deficiencies in profit structures among companies despite an 8.6 percent gain in the 10 months through October, experts said.

The continued improvement corresponds to a significant increase in public-private partnerships that just turned positive, according to Zhang Jun, chief economist at Morgan Stanley Huaxin Securities Co. The recent stabilization of economic growth is mostly driven by infrastructure and real estate investment, and the hi-tech industry will not benefit much from it.

Combined industrial profits jumped by a more-than-expected 9.8 percent in October from a year earlier on higher sales and producer prices as well as significant gains in traditional raw materials sectors such as coal, official figures show. Profits at companies with annual revenue of more than CNY20 million (USD2.9 million) also gained 7.7 percent from September, the National Bureau of Statistics said yesterday.

Continued profit growth at industrial companies is still questionable in two regards, Zhang said. First, demand is expected to sag again as the boost to economic growth created by infrastructure investment disappears in early 2017 and real estate regulation takes effect. Second, new supplies driven by rising prices may add to the existing overhang of production capacity, leaving little room for further profit growth.

Profit growth was distorted with traditional raw materials companies seeing a faster pace, while high-tech industries and equipment makers slowed. Increases were largely driven by rising prices. Industrial profits in the world's second-largest economy have picked up significantly this year after declining last year, advancing 8.6 percent in the 10 months through October from the same period in 2015.

Liu Zhe, vice president of Wanb Institute, said profit gains in the corporate sector are still excessively reliant on price increases.

Through fiscal and tax reforms, assistance should be provided to manufacturers --small and medium-sized firms, in particular -- to reduce costs, including financing and tax costs, said Zhang at Morgan Stanley Huaxin Securities. Moreover, the government needs to cut its reliance on infrastructure and real estate investment and ramp up spending on the manufacturing industry to boost demand for hi-tech products and high-end equipment.

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